Client Update - 21st July 2023

Last week US inflation came in lower than expected and this week it was the turn of the UK to produce a promising reduction from 8.7% to 7.9%. Food and alcohol price rises have finally started to slow and this contributed to inflation beating the expected figure of 8.2%. UK equities responded very positively to this news, with UK bond yields falling, creating a reciprocal rise in capital value.

He may not be the head of the US Federal Reserve (Fed) anymore, but like that famous stockbroker commercial long ago, when Ben Bernanke talks, people listen. Following a much-celebrated June pause in the year-long battle to squash inflation, Fed Chair Jerome Powell is expected to resume hiking rates this month. But his famous predecessor, veteran of the 2008 financial crisis, says it may be the last. Closing the book on the Fed’s landmark tightening campaign is emblematic of a growing belief in a soft landing for the US economy: Unemployment remains at half-century lows as inflation cools. Add to that the end of the pandemic and a suite of massive legislative programs unlike anything since the New Deal, and one could think the 2024 election was President Joe Biden’s to lose. However, even with his potential Republican rival facing multiple prosecutions, you would be wrong. White House officials started to worry about a month ago that Americans weren’t giving the Democrat sufficient credit for his economic achievements. Despite its vigour, a majority of Americans nevertheless feel sour about the economy. They may still be smarting from two years of historically high prices for everything, and those bruises could be overshadowing Biden’s accomplishments: He defused the GOP-induced debt-ceiling crisis. He passed through Congress sweeping bills to boost the green energy economy, subsidize the construction of new semiconductor factories, expand broadband access and repair hundreds of roads and bridges. But as of right now, “Bidenomics” may not be enough.

The final 18 months of US Presidential elections tend to be quite positive for markets, with announcements left, right and centre on how the candidates will stimulate the economy, boost growth, cut taxes etc in their first years in charge. Polls suggest that Trump is easily the most popular candidate among Republican-leaning voters. A CNN poll last month suggested that 47 per cent back him as a Presidential nominee.

The assumption is currently that the 2024 vote would be a choice between Trump and President Joe Biden. Despite polls suggesting Biden has a slight edge, Trump will be hoping that the economy falters between now and next year and, crucially, that a third-party candidate emerges to split the Democrat vote. Cornel West, a popular intellectual, seems likely to run on a Green party ticket, for example. And the No Labels group, which describes itself as bipartisan, is considering fielding either West Virginia senator Joe Manchin or former governor of Maryland Larry Hogan.

As the political polling website FiveThirtyEight points out, “Initial evidence suggests that, in a rematch between Biden and Trump, a No Labels and/or West campaign could pull marginal support from Biden and subtly shift the election towards Trump.”

People suspect that a second Trump term would differ from the first. Some predict he would be “hell-bent” on taking revenge on anyone who had challenged him in the first term. People who worked with Trump in the White House do say he will struggle to get establishment figures to work with him again, given how many were burnt during his first term, therefore leading to a quite maverick team to support him.

A re-elected Trump would be emboldened to challenge existing institutions. Analysts at the Bridgewater hedge fund recently warned clients that a second term is likely to produce “further degradation of several long-standing US government institutions and norms . . . and an increased risk of visible political conflict and instability”. Just the prospect of a close contest “heightens risk of one side or the other contesting or not accepting the result”, Bridgewater notes.

So far, the establishment doesn’t seem particularly panicked about these dark prognoses. Maybe this reflects a presumption that Trump will be knocked out of the contest by a lawsuit; as this week he moved closer to being indicted over the insurrection on 6th January 2021. Or maybe they assume that the prospect of Trump so horrifies Democrats that they will flock to the polls to back Biden, whatever their misgivings.

It is human nature to assume that if shocking events occur, they are a temporary aberration, be that the January 2021 insurrection, or the 2016 election of Trump. It does seem that America’s establishment is increasingly divorced, in a cognitive sense, from many low-income citizens, hence the continuing high levels of support for Trump. When a Chapman University poll asked voters about their biggest current fear, the top-ranked issue was “corrupt government officials”. History shows that not taking such risks seriously can mean they become more likely to occur. Can Trump return to “Make America Great” once again? Time will tell, but we are already working on the implications, which certainly include some positives for clients’ portfolios. For now, though, we are heartened by better news on inflation in developed markets and we are enjoying a recovery in risk assets. Do have a lovely weekend.